Will Anheuser-Busch InBev Be Able To Sustain Higher Margins In 2018 In The Face Of Currency Headwinds And Dwindling Revenues?

Anheuser-Busch InBev (NYSE: BUD), a multinational drink and brewing holdings company, is set to announce its fourth quarter 2018 results on February 28, 2019, followed by a conference call with analysts. The market expects the company to post revenue of $14.2 billion in Q4 2018, 2.7% lower than the $14.6 billion in Q4 2017. Adjusted earnings are expected to come in at $0.94 per share in Q4 2018, which marks a decline of 9.6% on a year-on-year basis. Lower revenues and earnings are likely to be the result of declining beer sales, loss of market share for Budweiser in the U.S., strengthening of the dollar, partially offset by growth in Asia-Pacific, coupled with synergy and productivity savings.

We have summarized our key expectations from the company’s Q4 results in our interactive dashboard – Will Currency Headwinds Be A Spoil Sport In Anheuser-Busch InBev’s 2018 Financial Performance?  In addition, here is more Consumer Staples data.

Key Factors Affecting Earnings

Sluggish sales in US and EMEA: Though the company is growing in its key markets due to continued premiumization, declining beer sales and higher marketing expenses in the U.S. are the main factors being a drag on overall performance. Lower beer sales are expected to lead to flat revenues in the US, whereas the EMEA region is likely to see a significant drop in sales. The primary reason for falling beer sales is changing consumer preferences, health consciousness, and increased awareness, which has shifted consumers to healthier drinking options such as wine and drinks like sparkling water.  This industry trend is pushing most of the beer companies to diversify and include newer drinks or innovate the beer range by lowering the alcohol content. The company’s flagship Budweiser and Bud Light brands continued to lose market share though 2018. In the third quarter, Bud Light and Budweiser lost 90 bps and 35 bps of the total market share, respectively. This is expected to adversely affect revenues in the US and Europe.

Benefits from FIFA sponsorship:  Budweiser was the global beer sponsor of the FIFA World Cup 2018, held in Russia in June-July. Partnering with such a massive event, which boasts of an audience of over 3.2 billion, bodes well for the company. Its biggest commercial campaign called “Light Up the FIFA World Cup” was activated in more than 50 countries, which included not only those where the brand already has a significant presence such as China, Brazil, the U.K., and Russia, but also new markets like Colombia, Peru, Ecuador, Australia, and Africa. Despite bleak results in the U.S., the company’s three global brands Budweiser, Corona, and Stella Artois continue to reflect strength outside the U.S. Consolidated revenues for these major brands improved 7.7% globally and increased 10.6% outside home markets in the third quarter, mainly benefiting from the FIFA sponsorship. We expect these three premium brands to continue to post superior performance in FY 2018 and beyond.

Growth in China: We expect revenue from Asia-Pacific to grow by a whopping 15% in 2018, mainly driven by strong growth momentum in China since the beginning of the year, fueled by successful brand activations and ongoing premiumization. Budweiser is likely to perform very well in Q4 and over the entire year, supported by a more balanced growth profile benefiting from increased penetration in more regions of China. The company’s super premium portfolio continues to deliver strong growth off a meaningful base, led by Corona. Additionally, BUD’s business in the e-commerce channel continues to be a relevant contributor to growth as this channel is of increasing importance to the Chinese consumer, especially for premium products.

Profitability: BUD continues to reap benefits from synergies achieved from the acquisition of SABMiller. In the first nine months of 2018, the company achieved total synergies and cost-savings of $588 million. We believe that the company will continue to achieve cost-reduction as the synergy guidance remains at $3.2 billion, which is expected to be delivered within the four-year period following the close of the combination. This will, in turn, provide a fillip to margins in 2018. Also, the marketing and sales expenditure is concentrated in the first half of the financial year. Consequently, the margin pressure should further ease in the final quarter of the year. However, currency headwinds are expected to remain the biggest deterrent to growing margins. Strengthening of the US dollar vis-à-vis other currencies affected the company’s top as well as bottom line in the first nine months. As per the trend observed over the last few quarters, currency headwinds are expected to lead to mark-to-market losses on derivative instruments which will weigh on margins. Thus, we expect net income margin to marginally drop to 13% in 2018, from 14.2% in 2017.

Dividend Halved: BUD has cut its dividend in order to accelerate deleveraging towards its optimal capital structure with a net debt to EBITDA ratio of around 2x. We expect the total dividend pay-out in FY 2018 to be 1.80 euro per share, which would translate into a 50% cut compared to the previous year. Dwindling revenues along with a significant cut in dividend payment led to BUD’s stock price falling by over 30% in the last one year. However, we believe that the stock price still has some upside potential from its current level, driven by growing sales in emerging markets, the non-cyclical nature of the business, synergies and productivity savings achieved due to acquisition, focus on lowering debt which would in turn translate into better margins, and modest shareholder returns which are expected to grow over time.

We have a price estimate of $89 per share for Anheuser-Busch InBev’s share price, which is higher than its current market price.

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